“Greece’s economy, reeling from austerity measures demanded by creditors in exchange for rescue funds, contracted almost a percentage point more last year than the government forecast, according to Bloomberg calculations.
Gross domestic product dropped 7 percent from a year earlier in the fourth quarter after contracting a revised 5 percent on an annual basis in the third quarter; the Athens- based Hellenic Statistical Authority said in an e-mailed statement today. GDP declined 6.8 percent for the full year, according to Bloomberg calculations, compared with a 6 percent contraction projected in the government’s 2012 budget.
Greece is now in what is forecast to be a fifth year of a recession compounded by spending cuts and tax increases as the country seeks to trim its budget deficit and debt burden. Prime Minister Lucas Papademos’s government on Feb. 13 passed through Parliament a new package of austerity measures demanded by the European Union and the International Monetary Fund in exchange for a 130 billion-euro ($172 billion) second rescue plan.The fourth-quarter preliminary figure is based on available non-seasonally adjusted data, the statistics authority said. GDP declined a revised 8 percent in the three months through March and 7.3 percent in the second quarter, the agency said. It didn’t provide seasonally adjusted figures.”
(emphasis added)
To this we would like to point out several important facts: firstly, the incessant blame that is heaped upon 'austerity' with regards to its effects on the economy must be considered in light of economic theory. It is certainly true that the austerity measures as practicesd in the euro area thus far are deeply flawed in many respects.
As we have stressed on several occasions they suffer from two major
faults: the first one is that the policy is imposed with a view toward propping
up unsound credit instead of liquidating or restructuring it. The main aim is
not to 'save' the debtors, but their creditors. Both debtors and creditors were
foolish in amassing such a huge pile of credit claims during the boom. Alas,
what's done is done. Credit that has been unmasked as unsound must be
restructured, and there is no point in 'bailing out' creditors.
Secondly, the austerity measures have generally been designed in a
manner that puts the burden squarely on the back of tax payers, by sharply
raising taxes. Meanwhile, government spending cuts have generally taken a
backseat (this may however be changing). This offers little hope of generating
an economic recovery, as the economy ends up being burdened from two directions
at once: the burden of higher taxes and the burden of government
spending.
However, none of this is tantamount to saying that austerity is a bad
policy as such. The reality is that a retrenchment in government spending
will always lead to a decline in GDP in the short term. After
all, government spending is inter alia added to GDP as though it
represented a positive contribution to economic growth. To stop spending is
akin to taking away a heroin addict's drug. In the short term, he will suffer
greatly – but it is the only chance to cure him in the long term. In the short
term, the liquidation of malinvested capital will accelerate when deficit
spending stops. The cessation of unprofitable bubble activities will naturally
express itself as a decline in economic activity. However, in the longer term
it creates the necessary breathing room for the genuine generators of wealth to
rebuild economic growth.
By contrast, Keynesian deficit spending is akin to giving the addict an
even bigger dose of his drug, which will make him appear somewhat healthier in
the short term. However, beyond the short run effect, we can expect him to
crash and burn even worse than before. This is exactly what the loose monetary
and fiscal policies in the US have achieved after the Nasdaq bubble blew out.
In the short term, the easy money and spending addicted economy entered a new
'growth' phase. But this era of growth was a complete illusion – underneath the
positive economic data, the foundations of the economic structure rotted away.
In the end, the economy predictably crashed and burned.
Moreover, while we would certainly agree that no solution to
the Greek dilemma can be expected to be painless – regardless of whether the
default is made 'official' or if things are dragged out by yet another bailout
– it should be made clear that it is not 'austerity' that has produced the
losses that the economic contraction has unmasked.
All these losses really occurred during the boom that preceded the
contraction. That was the time period when capital was consumed on a grand
scale. It is impossible to wish these losses away. The errors of the
boom cannot be unmade. Therefore a period of painful adjustment is and always
was unavoidable for Greece's economy. It would all go much faster if like
Iceland, the government simply accepted its own bankruptcy and the associated
insolvency of the banking system. It should write off all the unsound debt and
start afresh. Naturally, in the beginning this would mean that even more
intense austerity would have to be imposed, as the government could no longer
borrow any money.
It would thus be forced to cut its spending to the level of its tax
revenues – at least if it were not to abandon the euro and began printing
money, which would be the most horrendous 'solution' of them all, as it would
soon plunge the country into a hyper-inflationary crack-up boom and collapse.
However, a default would certainly force the government to adopt all the
wide-ranging reforms it has thus far been so reluctant to adopt. There would be
immense economic pain in the short term, but the foundations for a lasting
recovery would be laid very quickly. Again, one only needs to look toward
Iceland or Estonia as pertinent illustrations that austerity can actually
deliver. Estonia may be the more relevant example, since the country never
abandoned its peg to the euro and actually acceded to the euro area once it had
brought its debt problems under control.
Subtle Signs of Improvement Overlooked
While everybody is fretting about the performance of the Greek economy
in 2011, it should be noted that after several years of recession, a lot of
malinvested capital has in fact been liquidated. We should therefore expect to
see some signs of improvement. This is indeed the case.
We have previously pointed out that the recent performance of the Greek
stock market belies the incessant wailing – the market has by now risen over
30% from its lows. The US traded Greek stock market ETF GREK has risen by 53%
in the space of one month. In some sense it is perhaps only an oversold bounce,
but then again, once a stock market has fallen by 90% from its high, what can
there be that it hasn't discounted yet? The fact of the matter
remains that the market's recent performance has been stellar.
It has in fact been one of the best performing markets in the world
since it has begun to rise from its January lows. Technically, the market has
managed to overcome the first major level of lateral resistance and has
established a (still only tenuous) foothold above important moving averages. As
we have noted last week, we would not necessarily be inclined to chase this
market. A pullback seems likely, perhaps we will even see a retest of the lows
at some point. This is inherently unknowable, but we do believe that the
potential downside of the Greek stock market is probably limited at this point.
Regardless of whether or not the Greek government eventually defaults, Greek
stocks are extremely cheap on a fundamental basis. As it were, the news always
look worst near a major low, but the market doesn't care about the past. It
cares only about the future.
The Athens General Index has put in a scorching rally since the early
January low – click chart for better resolution..
Due to a strengthening euro, the dollar-denominated ETF GREK has
performed even better – it is now up 53% from its early January low - click
chart for better resolution.
But what about the Greek economy? Isn't it a shambles? Yes, it is – clearly the economy is experiencing a depression. Unemployment has recently jumped above 20%, manufacturing and industrial output have declined sharply. Alas, there are nevertheless signs of improvement that have apparently been overlooked by many observers. At least we haven't seen or heard many people commenting on them.
“On January 31, Prime Minister Lucas Papademos presented to his European Union counterparts at the European Council in Brussels this selection of graphs and economic data displaying the progress that the Greek economy has made in some areas since 2009.
Competitiveness recovering
Within two years, 2010-11, Greece managed to regain over 50 percent of the competitiveness lost between 2000 and 2009. From 2009 to 2011, the real effective exchange rate (vis-a-vis its 26 EU trade partners), as measured by unit labor costs, fell from 114.9 to 107.4 index points.
Current account deficit decreasing
The current account deficit fell from 15 percent of GDP in 2008 to 9.4 percent in 2011
The deficit reduction is even more significant if the oil trade balance and the general government interest payments are excluded: In this case the deficit in 2011 was around 0 percent of GDP, down from 6 percent in 2008. This also demonstrates the burden of the debt servicing cost.
General government deficit and primary deficit shrinking
Despite the steep recession, the Greek government managed to drastically reduce the budget deficit. According to the latest Eurostat and troika data, the budget deficit in 2011 had declined by 6.5 percentage points since 2009. More specifically, there was a significant reduction in the general government deficit: from 15.8 percent of GDP in 2009 to 9.3 percent in 2011.
The budget deficit reduction is even more impressive if one looks at the primary budget deficit (i.e. excluding the cost of interest payments on the public debt), which fell from 10.6 percent of GDP in 2009 to 2.4 percent in 2011. This means that in just two years the primary deficit decreased by 8.2 percent of GDP, i.e. approximately 19 billion euros.”
Below are several charts illustrating these improvements:
Greece's real effective exchange rate
vs. the 26 other EU member nations measured by unit labor costs is declining
and is now back to the levels last seen in 2007 - click chart for better
resolution.
The current account deficit has
improved markedly as a result. Excluding oil imports and net interest payments,
there actually no longer is a current account deficit - click chart for better
resolution.
The government's deficit as a
percentage of GDP is coming in – especially the primary deficit has now shrunk
to only 2.4% of GDP – the best reading in four years.
In euro terms the improvement in the
deficit is of course even more noticeable.
We are of course not saying that 'happy times are here again'. There is a
lot more improvement needed before one can sound the 'all clear' for Greece's
economy. In all likelihood, lagging indicators such as unemployment will
continue to deteriorate for a while yet. But unless the present course is
derailed after the April elections – unfortunately this remains a very real
possibility, as Greece's 'hard left' seems to have garnered an enormous amount
of electoral support – the improvements should continue.
In other words, if it is possible to
keep the social tensions from erupting into even more profound upheaval and the
current economic policy is completely abandoned as a result, there is a good
chance that Greece's economy will look a lot better than today a year or two
hence.
So we are happy to report that in
spite of everything, there now seems to actually be a small light at the end of
the tunnel.
Perhaps this is what the stock market
in Athens is trying to tell us.
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